Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting?
A)Multiple IRRs
B)Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not
C)Incorporates the IRR as the reinvestment rate for the future cash flows
D)Comparing mutually exclusive projects

Question

Quizplus · Accepted Answer

The IRR method does not inherently disagree with the NPV method on the profitability of projects with ordinary cash flows. Both methods should indicate the same decision regarding acceptance or rejection of a project based on whether it adds value to the firm. The IRR method's potential problems include multiple IRRs, assuming the reinvestment of future cash flows at the IRR, and difficulties in comparing mutually exclusive projects, but not disagreement with NPV on basic profitability for projects with ordinary cash flows.

Which of the Following in NOT a Potential Problem Suffered